Elements of Typical Homeowners' Insurance Policies - Part 4: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Personal Insurance, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:
Nyce, Charles, ed. Personal Insurance. (Second Edition). 2008. Chapter 5, pp. 5.24-5.39.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-108-1. Name ten named perils that are typically covered under Coverage C: Personal Property of an HO-3 homeowner's insurance policy.

Solution S5-108-1. This question is based on the discussion in Personal Insurance, pp. 5.25-5.27. The following named perils are typically covered under Coverage C:

1. Fire or lightning;
2. Windstorm or hail;
3. Explosion;
4. Riot or civil commotion;
5. Aircraft;
6. Vehicles;
7. Smoke;
8. Vandalism or malicious mischief;
9. Theft;
10. Falling objects;
11. Weight of ice, snow, or sleet;
12. "Accidental discharge or overflow of water or steam";
13. "Sudden and accidental tearing apart, cracking, burning, or bulging";
14. Freezing - "if the insured has taken reasonable precautions to maintain the heat or has sut off and drained the system or appliances";
15. "Sudden and accidental discharge from artificially generated electrical current";
16. Volcanic eruption.

Any ten of the above suffice as an answer.

Problem S5-108-2.

(a) List the nine exclusions that would apply to all coverages under Section I of a typical HO-3 homeowner's insurance policy.

(b) List the three exclusions that would specifically apply to Coverage A: Dwelling and Coverage B: Personal Property of a typical HO-3 homeowner's insurance policy.

Solution S5-108-2. This question is based on the discussion in Personal Insurance, pp. 5.27-5.34.

(a) The following nine exclusions would apply to all coverages under Section I of a typical HO-3 homeowner's insurance policy:

1. Ordinance or Law;
2. Earth Movement;
3. Water Damage;
4. Power Failure;
5. Neglect;
6. War;
7. Nuclear Hazard;
8. Intentional Loss;
9. Governmental Action.

(b) The following three exclusions would specifically apply to Coverage A: Dwelling and Coverage B: Personal Property of a typical HO-3 homeowner's insurance policy:

1. Weather conditions;
2. "Acts or decisions of any person, group, organization, or governmental body";
3. Faulty workmanship.

Problem S5-108-3.

(a) What are the two purposes of the Insurable Interest and Limit of Liability condition in Section I of a typical HO-3 homeowner's insurance policy?

(b) Name five duties that an insured may have pursuant to the Your Duties After Loss condition in Section I of a typical HO-3 homeowner's insurance policy.

Solution S5-108-3. This question is based on the discussion in Personal Insurance, pp. 5.35-5.36.

(a) The following are the two purposes of the Insurable Interest and Limit of Liability condition in Section I of a typical HO-3 homeowner's insurance policy:

1. To limit the maximum payments for any single loss to the relevant limits shown on the declaration page.
2. To limit "loss payment to any insured to the extent of that insured's insurable interest in the property at the time of the loss".

(b) The following are the duties that an insured may have pursuant to the Your Duties After Loss condition in Section I of a typical HO-3 homeowner's insurance policy:

1. Giving prompt notice of loss to the insurer;
2. Notifying the policy if the loss is by theft;
3. Notifying the credit card company, electronic fund transfer (EFT) company, or access device company, if the loss involves a credit card, EFT device, or access device;
4. Protecting the property from further damage;
5. Cooperating with the insurer;
6. Preparing an inventory of damaged personal property;
7. Verifying the loss - including allowing an insurer to make copies of documents and to submit to examination under oath, if requested to do so;
8. Signing a sworn proof of loss;

Any five of the above suffice as an answer.

Problem S5-108-4.

(a) Under the Loss Settlement condition in Section I of a typical HO-3 homeowner's insurance policy, losses to personal property under Coverage C are settled on the basis of the lesser of which of two amounts?

(b) Mr. Σ's chair was destroyed in a fire and is a covered loss under Coverage C of his homeowner's insurance policy. No deductible applies to the loss. It would cost $200 to purchase an identical chair at today's market price. 12 years ago, the chair cost $500 and was depreciated using the straight-line method, assuming that the useful life of the chair is 18 years. How much will Mr. Σ be reimbursed for the chair?

Solution S5-108-4. This question is based on the discussion in Personal Insurance, p. 5.37.

(a) Under the Loss Settlement condition in Section I of a typical HO-3 homeowner's insurance policy, losses to personal property under Coverage C are settled on the basis of the lesser of

1. Actual cash value (ACV) of the damaged items at the time of the loss and
2. The cost to repair or replace the damaged items.

(b) It is given that the replacement cost of the chair is $200. Since the chair is depreciated in a straight-line fashion, it incurs the same dollar amount of depreciation per year. The annual depreciation is $500/(18 years) = 27.8888888. After 12 years have passed, there are 6 years left for the chair to depreciate, so the actual cash value of the chair prior to its destruction was 27.8888888*6 = 166.66666667 = $166.67 < 200, so the insurer will pay Mr. Σ $166.67 - the ACV of the chair.

Problem S5-108-5. Mrs. Ω owns a set of three statuettes made by the same sculptor. The statuettes are more valuable together than they are individually. The statuettes are insured by Mrs. Ω under Coverage C: Personal Property of an HO-3 homeowner's insurance policy. The following information is known:

A single statuette in Mrs. Ω's possession would have an actual cash value (ACV) of $500.
Any two statuettes in Mrs. Ω's possession would have a combined ACV of $1500.
All three statuettes in Mrs. Ω's possession would have a combined ACV of $5000.

The sculptor of the statuettes is able to make exact reproductions of each statuette, and doing this would always cost $3000 per statuette.

(a) What would the insurer do if all three statuettes were lost due to a covered loss?

(b) What would the insurer do if two of the three statuettes were lost due to a covered loss?

(c) What would the insurer do if one of the statuettes were lost due to a covered loss?

Solution S5-108-5. This question is based on the discussion in Personal Insurance, pp. 5.37, 5.39. The policy conditions that would apply here would be Loss Settlement, as well as Loss to a Pair or Set.

(a) In this case, the Loss Settlement condition applies, as if the set of statuettes were a single unit. The insurer would pay the lesser of ACV and replacement cost. Here, the ACV of the statuettes is $5000, whereas the replacement cost for all three is 3000*3 = $9000, so the insurer would pay $5000 to Mrs. Ω.

(b) Here, the Loss to a Pair or Set condition applies, and the insurer would have the choice of either replacing the missing statuettes (at a cost of 2*3000 = $6000) or paying Mrs. Ω the difference between the ACV of the entire set and the ACV of the remaining statuette (at a cost of 5000 - 500 = $4500). Since 4500 < 6000, the insurer would pay $4500 to Mrs. Ω.

(c) Here, the Loss to a Pair or Set condition applies, and the insurer would have the choice of either replacing the missing statuette (at a cost of $3000) or paying Mrs. Ω the difference between the ACV of the entire set and the ACV of the remaining two statuettes (at a cost of 5000 - 1500 = $3500). Since 3000 < 3500, the insurer would replace Mrs. Ω's missing statuette. The information given suggests that the insurer would hire the original sculptor and pay the sculptor $3000.

See other sections of The Actuary's Free Study Guide for Exam 5.